Fewer trees expected to be planted

GLOBAL car­bon credit prices have fallen to all-time low lev­els in re­cent weeks be­cause of a com­bi­na­tion of eco­nomic down­turn and mar­ket over-sup­ply.

Price move­ments in Europe are di­rectly af­fect­ing do­mes­tic car­bon prices, spark­ing de­bate about the ef­fi­cacy of the New Zealand Emis­sions Trad­ing Scheme (NZETS) and its im­pact on the forestry sec­tor.

So what are the driv­ers of in­ter­na­tional prices, why do they dic­tate the price of car­bon in New Zealand, and what does it mean for agri­cul­ture and forestry?

The Euro­pean emis­sions trad­ing scheme was the first, and is the largest, car­bon trad­ing scheme glob­ally.

If a com­pany emits less car­bon diox­ide (or other green­house gases) than expected it can sell the ex­cess to other com­pa­nies.

Fun­da­men­tally, the price of car­bon is driven by a num­ber of fac­tors, in­clud­ing eco­nomic ac­tiv­ity, the de­mand for elec­tric­ity, the price of com­modi­ties such as gas, coal and crude oil, the weather.

Dur­ing the past 18 months a com­bi­na­tion of over- al­lo­ca­tion of EUAs and a re­duc­tion in de­mand be­cause of the se­vere eco­nomic down­turn in Europe has seen the price of EUAs plum­met from about €17 (NZ$27) eigh­teen months ago, to un­der €7 in re­cent weeks.

Euro­pean emit­ters are also able to use some UN-is­sued car­bon cred­its to sup­ple­ment their EUA al­lo­ca­tion.

The most com­mon UN-is­sued units are the CER (Cer­ti­fied Emis­sion Re­duc­tion – for emis­sion-re­duc­ing projects in de­vel­op­ing nations) and the ERU ( Emis­sion Re­duc­tion Unit – for car­bon re­duc­ing prod­ucts in de­vel­oped nations). These UN-is­sued units num­ber in the bil­lions, adding to the over­sup­ply in Europe.

As the NZETS stands, do­mes­tic emit­ters can buy and sur­ren­der ei­ther the do­mes­tic car­bon unit (NZUs) or any eli- gible ‘‘ Ky­oto Unit’’ (for­eign car­bon cred­its) to cover their obli­ga­tions.

As the price of for­eign car­bon cred­its has fallen, do­mes­tic emit­ters have bought off­shore units, pri­mar­ily CERs and ERUs in pref­er­ence to NZUs.

This has had the ef­fect of de­creas­ing de­mand for the lo­cal car­bon cred­its, forc­ing down the price of NZUs.

While Euro­pean emit­ters are lim­ited in their abil­ity to use cheaper UN cred­its, lo­cal emit­ters face no such re­stric­tions and are able to buy and sur­ren­der un­lim­ited amounts of cheap for­eign car­bon cred­its. Do­mes­tic prices are there­fore be­ing dic­tated by global driv­ers and mas­sive over­sup­ply.

The im­pact on do­mes­tic prices has been se­ri­ous, to say the least.

Only 18 months ago NZUs were trad­ing at $20 a tonne, but had fallen to un­der $4 a fort­night ago.

De­spite be­ing re­spon­si­ble for al­most 50 per cent of the na­tion’s emis­sions, the agri­cul­tural sec­tor has yet to feel the di­rect im­pact of the ETS.

The sec­tor was al­ways sched­uled to be the last of the emit­ting sec­tors to en­ter the scheme and re­cent changes to leg­is­la­tion mean the ear­li­est this can oc­cur is post-2015.

The Gov­ern­ment has de­ferred the in­tro­duc­tion of the agri­cul­tural sec­tor un­til:

Tech­nolo­gies ex­ist to en­able the re­duc­tion of bi­o­log­i­cal emis­sions, and

Our in­ter­na­tional com­peti­tors in the sec­tor are also tak­ing ac­tion to re­duce their emis­sions. The im­pact of low car­bon prices has been very dif­fer­ent for the forestry sec­tor how­ever.

Forestry was the first sec­tor to en­ter the NZ ETS, which makes a dis­tinc­tion be­tween pre-1990 and post-1989 forests. This re­flects a de­sire to re­duce de­for­esta­tion and pro­mote aforesta­tion.

The rules for pre- 1990 forests are in­tended as a dis­in­cen­tive to change the use of for­est land. Should the owner of a pre-1990 for­est wish to defor­est the land per­ma­nently (in or­der to con­vert to dairy, for ex­am­ple) they are li­able for the en­tire car­bon stock of the for­est. With the price of car­bon at $20 a tonne this rep­re­sented a cost of al­most $16,000 a hectare for the car­bon li­a­bil­ity alone – a sig­nif­i­cant dis­in­cen­tive.

As the price of car­bon has fallen, so the fi­nan­cial dis­in­cen­tive to har­vest and defor­est per­ma­nently has de­creased.

Per­versely, the price of car­bon is now so low it is pro­vid­ing an op­por­tu­nity to defor­est in pref­er­ence to re­plant­ing.